Savings Rates, Money Market Rates Will Increase in 2014

We didn't see any big changes in average money market account rates or savings account rates this week. The best savings rates and money market account rates also remain unchanged. Both average rates and the best rates available will remain at current levels until the Federal Open Market Committee (FOMC) votes to increase the federal funds rate.

A higher fed funds rate isn't possible until the unemployment rate falls from the current level of 7.5 percent to below 6.5 percent. The FOMC has stated this in many meetings the past year. The FOMC has also said they don't think the rate will fall below 6.5 percent until late 2014 but I believe it will happen sooner.

Lower Unemployment Rate Will Cause Interest Rates to Increase

Since the beginning of 2013, the unemployment rate has fallen from 7.9 percent down to 7.5 percent, an average drop of 0.1 percent a month. If the rate continues to fall at that level, we could see the rate at 6.5 percent in May of 2014 - about four to six months sooner than the FOMC expects. At that point, the FOMC will start increasing the fed funds rate and banks will follow with higher money market rates and higher savings rates.

Current national average savings/money market rates increase for higher account balances. The current national average money market/savings rate on account balances of at least $10,000 is at 0.47 percent. Account balances of at least $25,000 earn a rate of 0.67 percent on average. Account balances of at least $50,000 earn a rate of 0.67 percent on average.

Federal Fund Rate Increase

The increase in the fed funds rate will happen quickly since the current rate, at near zero percent, is accommodating in order to spur economic growth. A more neutral position for the fed funds rate would be at 1.00 percent to 2.00 percent, depending on the pace of economic growth and the inflation rate.

The higher the rate of GDP growth and the higher the inflation rate, the faster the Fed has to increase rates. By the end of 2014, the fed funds rate will probably be in the 2.00 percent to 3.00 percent range. At that point, banks will increase savings rates/money market rates to the same level.